Answer
a) Firm C would sell 40 permits, and Firm B would buy all 40 permits. The cost of reducing pollution is 1100 dollars.
b) The costs would be 600 dollars higher.
Work Step by Step
a)
Firm A cost to clean up:
$70-40=30$
$30*20=600$
Firm B cost to clean up:
$80-40=40$
$40*25=1000$
Firm C cost to clean up:
$50-40=10$
$10*10=100$
Firms will only buy permits if the cost of reducing pollution is more than the cost of the permit.
If the cost of the permit is 20 dollars, then firm A is indifferent since the cost is 20 dollars. At a cost of 20 dollars, firm B would buy permits from firm C. Firm B's cost of reducing pollution is 25 dollars, so the permit would be cheaper. Firm C's cost of reducing pollution is 10 dollars, so the permit would be more expensive than reducing pollution.
Firm A cleans up 30 units of pollution at 20 dollars per unit (for a total of 600 dollars). Firm B buys all of Firm C's permits, so there is no cost to Firm B. Firm C pays 10 dollars to clean up each of the 50 units of pollution (for a total of 500 dollars).
$600+500=1100$
b)
Firm A cost to clean up:
$70-40=30$
$30*20=600$
Firm B cost to clean up:
$80-40=40$
$40*25=1000$
Firm C cost to clean up:
$50-40=10$
$10*10=100$
$600+1000+100=1700$
$1700-1100=600$
